ConvergEx Group Chief Market Strategist Nick Colas, one of the
only Wall Street analysts who has taken an interest in Bitcoin,
writes in a note this morning that the reason for these DDoS
attacks is that hackers are trying to knock the virtual currency
down in order to scoop it up at cheaper prices.

In a note to clients this morning, he writes:

Now here’s the weird bit: hackers attack the
infrastructure (exchanges and wallets) around the core open
source software because they want to BUY bitcoins at reduced
prices.

Their idea is to sew some
confusion in the market, shake out owners who have large gains
and don’t want to lose them, buy in the resulting melee, and sell
when things return to normal. It usually takes barely more than a
day, seems pretty easy to do, and yields a big payoff.

Mt. Gox released a
notification on its Facebook page overnight to the
effect that yesterday's slowdown was not, in fact, due to a DDoS
attack, but instead was a result of the rapid amount of new users
that have flocked to the trading platform in recent days and
weeks.

Whatever the cause, the key here is that the Bitcoin market
has to transition to a state of lower volatility before it can
really gain widespread acceptance. Days like yesterday don't do
much to inspire confidence in the virtual currency from a wider
group of consumers and investors.

According to Colas, "This is where bitcoin stops being a science
project and starts helping anyone interested in capital markets
or macro policy understand our world just a little bit better."

In his note, he brings up three points related to the volatility
issue:

Trust is the keystone of any currency as well as
the macroeconomic policies and support structures which surround
it. Even if bitcoin fully recovers
from today’s problems, it is still a black eye for the support
structures around the core “Mining” process. The Fed has a lot
more leeway for error – the dollar is still the legal tender of
the U.S., for better or worse.

Volatility matters more than
level. Recall our two trader’s
aphorisms at the top of this note. Wild price swings are tough on
humans; they encourage fear-based decisions which often prove
ill-informed and expensive. Watching the churning volatility of
the bitcoin market today, I had a new appreciation for the Fed’s
controversial bond buying programs. The Fed knows that price
volatility in capital markets is the true enemy of economic
recovery after the storms of 2007-2008. By flooding the financial
system with liquidity, they reduced the fears of another
crisis. It just so happens that lower equity market
volatility is tied to higher prices. But the real goal for the
Fed – and one that it has accomplished in spades – is to dampen
volatility so businesses, consumes, and investors don’t thrash
about making fear-driven choices. This approach hasn’t been
cheap, to say the least. But there’s no doubting that it has had
its intended outcome.

Before today, Bitcoin had been an almost unalloyed
marketing and investment success. Its
central value proposition – anonymous, decentralized, open source
code-based "Money" – appeals to a wide swath of the developed and
emerging world. And there is still a lot of interest in
leveraging the core infrastructure to provide a unique, secure,
low cost payment system which works as well in Delhi as Dallas,
Boston as Beijing. But every investor or entrepreneur who wants
to take that journey needs to understand that the path will be
far shorter and easier if bitcoin price volatility is much lower
than what we saw today.

In short, whatever the cause of yesterday's sell-off – whether it
was hackers trying to manipulate the market down or just a
massive influx of new users – exchanges like Mt. Gox will
have to figure out ways to mitigate volatility like that in
order to attract a wider user base.